When is the best time to take Social Security? This is a question that every one of us has either had to answer or will answer at some point in our lives. Social Security is actually a very complicated system with many choices, and today we will just begin to touch the surface.
What are your basic choices? Take it early at age 62, wait until you hit full retirement age which is around age 66, or postpone until age 70. As you would expect, the earlier you take it the lower your monthly income…and this makes sense. In theory, if you take it early you will be receiving income for more years so you will receive a lower amount each month. I tell people that it is basically a math formula that takes your life expectancy and divides your total Social Security money over the number of years you are expected to live. Thinking of it that way, if you die the year you are expected to die, it does not make that big of a difference when you start taking the benefit since all scenarios will add up to basically the same amount of income over time.
But wait, there is more to think about.
How long will you live? If you think you will live longer than the average person, in most cases it makes sense to postpone starting your payments which will increase your monthly benefit. The more “extra” years that you add on post life expectancy the better your decision will have been.
Do you trust that the system will be around? If you think this benefit will go away then you might as well take all you can get early. I personally think the system does need to be changed but I don’t believe it will be taken away from Americans. It may become needs-based or they may tweak some things like when we can start to take it or how raises are calculated…but I don’t think it will be taken away.
Are all of your assets tied up in IRAs? Many people retire after building up sizeable 401(k) plans at work. This is great until you need the income. Every dollar that you take out of a 401(k) or IRA can be fully taxable and this can drain your portfolio pretty quickly. In some cases it makes sense to start taking Social Security early to alleviate having to take so much out of a taxable bucket of money.
Are you married? If you are married the decision moves from what is the best for “me” to what is the best for “us”? As a couple, your number of choices of how and when to take Social Security increase dramatically. You now have the responsibility of thinking about the surviving spouse many years from now. When should the higher wage earner start benefits in order maximize the monthly income for the surviving spouse? In some cases it may make sense for the higher wage earner to wait until 70 so he or she tops off Social Security with the highest amount possible. Why? Here is the magic: if the higher wage earner dies first after benefits have begun, their higher monthly benefit will continue for the surviving spouse. In other words, the survivor’s smaller income will be replaced with the deceased partner’s higher benefit. As a married couple you get the benefit of leveraging quirky details in the law to maximize your benefits over your lifetime… so don’t apply without getting help with your options.
The one rule that you must follow is that there is no one rule. Social Security has no clear cut option. It is a system of some complex choices, especially if you are married or have been married before, that requires a careful analysis before moving ahead. Don’t be afraid to get the help you need before signing up for the monthly check.